Today’s Blog – Thursday 8th October 2015

“Events” in the Middle East – focused on Syria – appear to be hotting up. There are many potentially very negative scenarios that could evolve. However, the oil market appears to be ignoring these for just now (see below).

The latest development was Russia’s use of ship-borne cruise missiles, fired all the way from the Caspian sea over 1,500 km away to hit IS targets in Syria. There was presumably a multi-dimensional aspect to the use of this sort of weapon – for instance showing various (and sometimes unruly, when viewed from Moscow) Caucasus countries what Russia can do.

Some of these nations are strategically important for global oil and gas markets (for instance, Kazakhstan’s massive Kashagan oil-field is due to start production in ~2017 – bringing a material ~0.5 mmbopd to crude markets – a generally un-remarked supply-side development at present).

The chances of mistakes and escalations in the broader Middle East are unfortunately multiplying.

Commodity markets

Crude prices fell overnight, both as a pull-back from yesterday’s very sharp rise, and in response to the weekly EIA report. The latter showed an unexpectedly large crude inventory build of 3.1 mmbbls (which included a build at the key location of Cushing, Oklahoma). Gasoline stocks also built (by 1.9 mmbbls), whilst diesel stocks fell by 2.5 mmbbls (those VWs continue to chew up fuel!).

Brent closed at US$51.62 and WTI at US$48.10.

An interesting recent report on the US rig fleet could impact in due course on that other key “number” from the US – the rig count. The report noted that the large amount of idle rigs were being widely cannibalised for spare parts to support the actve rig fleet – as a cheaper option in these cash-constrained times compared to buying new parts.

It was concluded that the ability of the idle rig fleet to respond to higher oil prices would be constrained by this cannibalisation – with a period of many months being required to get rigs back in the field. This is yet another factor which could cause what Shell’s CEO recently called a “spike” in future crude prices as spare capacity is eaten out of the system on multiple fronts.

The Henry Hub natural gas price was stable again at US$2.48.

LNG

One immediate consequence of Russia’s actions in Syria has been a suspension of discussions with Turkey over the mooted TurkStream pipeline from Russia-to-Turkey-to-Greece. Although in my view this was a troubled project anyway, this shows the impact of current “events” on international gas markets as well as oil ones.

Meanwhile over in the Gulf of Mexico, the count-down to first material US LNG exports continues. Cheniere Energy has started to receive gas into its Sabine Pass liquefaction plant in Louisiana and first cargoes should leave in the next couple of months.

Company news – Origin Energy (ORG)

ORG yesterday formally withdrew various motions from its forthcoming AGM in connection with bonuses for its Executive Directors. Given the very large share price fall experienced by ORG shareholders over the last year there could well have been a “first strike” vote against the company’s remuneration report at the AGM if this had not occurred. Indeed, a large-ish protest vote over that item could still eventuate.

ORG has otherwise been blessed over the timing of its current rights issue – with the recent strong oil price and a deeply discounted rights’ price ensuring strong shareholder support. Media reports suggest that any shortfall on the retail part of the issue should be negligible.

Company news – Santos (STO)

STO’s news in the last couple of days is of the “dog-not-barking” variety. No news has come out of what was flagged as a milestone Board meeting earlier this week.

Asset sale negotiations are presumably taking longer than the company’s Board would like – and unpersuasive media leaks about selling part of GLNG do not appear to have forced the hands of buyers for other more compelling assets.

Company news – Drillsearch Energy (DLS)

DLS has today reported on an exploration well in the Cooper Basin – Washington-1 – which is being funded by a STO farm-in.

The well was targeting tight gas in various formations and DLS reported that it had found a target that could be “hydraulically stimulated” (don’t mention the “frack”!). That target appears to be in a sandstone rather than in the deep coals which a number of industry observers considered to be prospective in this area.

Quote of the day

The Saudi Arabian “Game of Thrones” has recently been fuelled by an anonymous letter circulating the country, said to be written by an unhappy faction of princes:

“We will not be able to stop the draining of money, the political adolescence, and the military risks unless we change the methods of decision making, even if that implied changing the king himself.”